As widely expected, the Federal Reserve announced it will hold interest rates steady following the FOMC’s meeting on September 19-20. However, it predicted that there could be an additional 25 basis point rate hike later this year.
In a high-interest rate environment, most sectors usually struggle with a high cost of capital. However, the financial sector typically thrives in a high interest-rate environment because its revenues correlate positively to interest rates. Therefore, it could be wise to buy fundamentally strong consumer financial stocks OneMain Holdings, Inc. (OMF), FirstCash Holdings, Inc. (FCFS), and Regional Management Corp. (RM).
These stocks are rated A (Strong Buy) or B (Buy) in our proprietary POWR Ratings system. Before diving deeper into the fundamentals of these stocks, let’s discuss how the consumer financial sector will benefit in a high-interest rate environment and what could drive its performance.
Although the federal fund rates remain in the range of 5.25% to 5.5%, the Fed has warned that the war against inflation is far from over. The Summary Economic Projections (SEP) showed that there could be another rate hike by the end of this year, meaning the fed funds rate could peak in the 5.50% to 5.75% range. The SEC also projected rate cuts of 50 basis points next year.
Greg McBride, CFA, Bankrate’s chief financial analyst, said, “It is an open question as to whether the Federal Reserve will raise interest rates further in future meetings, and inflation more than anything else will dictate their course. The Fed has moved interest rates above the rate of inflation and will keep them there for an extended period. Even if they feel there is no need to raise rates further, to say so at this juncture would be premature.”
With rate cuts still some time away, the high benchmark interest rates could benefit financial companies. Consumer financial services companies offer financial products and services to individuals, households, and small businesses. Revenues of these companies get a boost in a high-interest rate environment as borrowers need to pay more on their debt. Higher interest rates help widen the spread for consumer financial companies.
Additionally, their credit quality improves as borrowers with good credit scores and stable incomes become eligible to borrow at higher rates.
With these favorable trends in mind, let’s delve into the fundamentals of the three Consumer Financial Services stock picks, beginning with the third choice.
Stock #3: OneMain Holdings, Inc. (OMF)
OMF is a financial service holding company that is engaged in the consumer finance and insurance business. The company originates, underwrites, and services personal loans secured by automobiles, other titled collateral, or unsecured. The company offers credit cards and insurance products comprising life, disability, involuntary unemployment, and optional non-credit insurance.
In terms of forward non-GAAP P/E, OMF’s 7.26x is 19.3% lower than the 9x industry average. Its 1.15x forward Price/Sales is 49.3% lower than the 2.26x industry average. Likewise, its 0.93x forward non-GAAP PEG is 23.4% lower than the 1.21x industry average.
On May 2, 2023, OMF announced that it had chosen FinMkt to expand in the competitive home improvement point-of-sale financing market with loans originated by WebBank. OMF’s Chief Strategy Officer Jenny Osterhout said, “As we advance our mission to improve the well-being of hardworking Americans, we are excited to partner with FinMkt’s impressive technology platform to help us serve more customers.”
OMF’s interest income for the second quarter ended June 30, 2023, increased 1% year-over-year to $1.12 billion. Its total other revenues rose 44.5% year-over-year to $185 million. The company’s net income came in at $103 million. Also, its EPS came in at $0.85. In addition, its net interest income came in at $873 million.
Analysts expect OMF’s EPS and revenue for the quarter ending September 30, 2023, to increase 0.2% and 2% year-over-year to $1.51 and $1.09 billion. Over the past nine months, the stock has gained 22.6% to close the last trading session at $40.73.
OMF’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #5 out of 50 stocks in the Consumer Financial Services industry. It has a B grade for Quality. Click here to see the additional ratings of OMF for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: FirstCash Holdings, Inc. (FCFS)
FCFS operates retail pawn stores in the United States, Mexico, and the rest of Latin America. Its pawn stores lend money on the collateral of pledged personal property, including jewelry, electronics, tools, appliances, sporting goods, musical instruments, and retail merchandise acquired through collateral forfeitures on forfeited pawn loans and over-the-counter merchandise purchases directly from customers.
In terms of forward EV/Sales, FCFS’ 1.88x is 36.6% lower than the 2.97x industry average. Its 1.37x forward Price/Sales is 39.3% lower than the 2.26x industry average.
For the fiscal second quarter that ended June 30, 2023, FCFS’ revenue increased 15.9% year-over-year to $750.62 million. Its adjusted EBITDA rose 11.5% over the prior-year quarter to $107.47 million. The company’s non-GAAP net income increased 8.6% year-over-year to $55.55 million. Also, its non-GAAP EPS came in at $1.22, representing an increase of 13% year-over-year.
For the quarter ending September 30, 2023, FCFS’ EPS and revenue are expected to increase 4.9% and 15.2% year-over-year to $1.36 and $774.51 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 17.3% to close the last trading session at $95.48.
FCFS’ POWR Ratings reflect this promising outlook. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Stability and Sentiment. It is ranked #4 in the same industry. To see the other ratings of FCFS for Growth, Value, Momentum, and Quality, click here.
Stock #1: Regional Management Corp. (RM)
RM, a diversified consumer finance company, provides various installment loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other lenders. It offers small and large installment loans, retail loans, and other retail products.
On March 22, 2023, RM announced that it commenced its lending operations in Arizona, which will be its 19th U.S. state, opening its first branch during the second quarter. RM’s President and CEO Robert W. Beck said, “We are excited to bring our suite of affordable financial solutions to consumers in Arizona and further expand our operations within the southwestern U.S.”
“We are currently servicing loans through our centralized sales and service teams, and we will eventually expand those efforts to branches in the state. Our measured expansion strategy continues to enable us to deliver controlled, sustainable growth and long-term value to our shareholders,” he added.
In terms of forward non-GAAP P/E, RM’s 7.47x is 17% lower than the 9x industry average. Its 0.49x forward Price/Sales is 78.4% lower than the 2.26x industry average. Likewise, its 0.80x forward Price/Book is 19.2% lower than the 0.98x industry average.
RM’s total revenue for the fiscal second quarter that ended June 30, 2023, increased 8.6% year-over-year to $133.48 million. Its interest and fee income rose 7.6% year-over-year to $118.08 million. The company’s net income came in at $6.02 million. Moreover, its net EPS came in at $0.63.
Street expects RM’s EPS for the quarter ending December 31, 2023, to increase 139.6% year-over-year to $1.29. Its revenue for the quarter ending September 30, 2023, is expected to increase 5.6% year-over-year to $138.87 million. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 9.6% to close the last trading session at $27.36.
RM’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked first in the Consumer Financial Services industry. It has a B grade for Value, Stability, and Quality. Click here to access the ratings of RM for Growth, Momentum, and Sentiment.
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OMF shares were unchanged in premarket trading Thursday. Year-to-date, OMF has gained 31.44%, versus a 14.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
3 Top-Rated Stock Buys in the Consumer Financial Sector StockNews.com
